When one is in need of funds urgently, everyone thinks of their family, friends or personal loans. Very few people think about loan against their fixed deposits. There are even fewer people who consider loan against securities that they own.
If you didn’t know, you can take a loan against all your investments such as shares, mutual funds and bonds. How is that possible? It’s simple. You can use them as collateral for getting a loan. Let’s tell you all about loan against securities.
What are securities?
Many of your financial assets including shares in your demat account, mutual fund units, exchange-traded funds, bonds and insurance policies can be used as collateral to get a loan. Most of the banks or financial institutions might provide loans for only ‘approved’ securities. The list of approved securities might differ from one lender to another. This means that if you want a loan against shares, only if the shares are in the lender’s approved list, you will get a loan.
Financial institutions usually grant loan amounts that are as low as Rs 1 lakh and as high as Rs 10 crore.
Both resident Indians, as well as NRIs above the age of 18 years, are eligible for taking a loan against securities. Only individuals are granted loans against shares, government bonds and insurance policies. Companies and business owners may not be able to get a loan against these securities. However, some institutions might provide loan against debt mutual funds for companies.
The interest rate
Interest charged for a loan against security is at 9%-10%, which is much lower than that of a personal loan which can be anywhere between 12% and 18%. There are banks that charge interest on a daily basis. You can have the loan for a day, pay interest for that day and close the loan without charges. However, in case of a personal loan, you will need to pay monthly instalments and there are preclosure penalties. In fact, some lenders might not allow you to close the loan until a few years without a prepayment penalty.
Just like any other loan, you will have to provide documents for getting a loan against securities. These will include proof of identity, proof of income, proof of residence, bank statements and pledge form for pledging the securities. However, the overdraft facility offered is like an easy loan. Once you have the loan against security in place, you can get additional amount without submitting the documents once again.
Loans against securities are often given out as an overdraft, just like you get an overdraft against your fixed deposit. So, the maximum overdraft that you can draw is capped. Like in the case of a fixed deposit, don’t expect to get loan up to 90% of the value of your assets. Most financial institutions limit the loan amount to 50%-70%. Usually, for shares, the overdraft limit is lower when compared to that of mutual funds.
In case the lender is going to take your securities as collateral, you will be offered a loan of up to 50%-70% of the market value of the securities. For example, Tata Capital provides loans of up to 50% of market value of shares and up to 70% of market value of the Net Asset Value (NAV) of mutual funds.
Banks usually open a current account and deposit the loan amount in that account. The interest is charged only for the amount of loan that you actually utilise and for the time period for which you use it. So, interest will be charged only for the amount you withdraw from the current account. You even get a debit card and mobile banking facility.
You can repay the loan in monthly instalments. You could even make only interest payments and repay the principal at the end of the loan term. Most banks offer loan against securities only for a year and it is often extended on a yearly basis if you want more time to repay the loan. You can repay the full loan at any point in time. There are usually no charges for repaying the loan before the end of the term. While you are repaying the loan, your securities will continue to appreciate (shares, mutual funds) in value.
So, the next time you have a financial emergency and need a loan, you know what to do. Make sure that you read all the terms and conditions carefully before getting the loan.